Islamic finance in Europe (132)

Continuation

Traditionally, however, Islamic banks have had significant exposure linked to real estate assets.

This asset class provides a natural hedge against inflationary pressure.

As such, Islamic banks have had to monitor their inflation risk closely due to the possible consequences for asset price valuation.

In summary, Islamic banks face a unique risk exposure that includes both:

-      interest rate;

-      and inflation risks.

Interest rate risks arise through:

-      deferred payment sales;

-      leasing arrangements benchmarked to interest rates;

-      and displaced commercial risk.

From the research paper of European Central Bank

(Authors: F.Mauro, P.Caristi, S.Couderc, A.D.Maria, L.Ho, B.K.Grewal, S.Masciantonio, S. Ongena and S.Zaher)